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What Is A Credit Report? How does a creditor decide whether to extend you credit? For years, creditors have been using credit scoring systems to determine if you are a good risk for credit cards and auto loans. More recently, credit scoring has been used to help lenders evaluate your ability to repay mortgage loans. What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points (a credit score) helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. Because your credit report is an integral part of applying for a home loan, it is very important to make sure it is accurate before you apply. To get copies of your report, contact the three major credit reporting agencies: Equifax: (800) 685-1111 Experian (formerly TRW): (888) 397-3742 Trans Union: (800) 916-8800 The agencies may charge you up to $ 9.00 for your credit report, however some states have passed a free annual credit report law that allows residents to check their report on an annual basis for no cost. Why is credit scoring used? Credit scoring is based on real data and statistics, so it is considered more reliable than subjective methods. It treats all applicants objectively. While it may appear that such a system is arbitrary and impersonal, such a system can help make decisions faster, more accurately, and -- most importantly -- more impartially, than individuals when it is properly designed.
How is a credit scoring model developed? To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company. Is It Fair? Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics, such as race, sex, marital status, national origin, or religion, as factors. However, creditors are allowed to use age in properly designed scoring systems. How reliable is the credit scoring system? Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, the model must be based on a large enough sample. What happens if you are denied credit or don't get the terms you want? If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or informs you of your right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."
Where can you get more information? The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on consumer issues , visit www.ftc.gov or call toll-free, 1-877-382-4357 The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel , a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad. |